Special interests use donations to influence the political process. This column shows that philanthropic efforts in the US are targeted, at least in part, to influence legislators. Districts with influential politicians receive more donations, as do non-profits with politicians on their boards. This is problematic because, unlike PAC contributions and lobbying, influence by charity is hard for the public to observe.

Donald Trump came to office in part on his promises to “drain the swamp” – as an independently wealthy outsider candidate, he would be insulated from the influence of special interests that had corrupted Washington politics. In this regard, Trump follows in a long tradition. For as long as there have been governments, there have been reformers labelling them as corrupt and putting themselves forward as the ones to clean up the problem.

But anticorruption reformers quickly come up against the reality that special interests have many instruments of influence. While some are illicit (for example the campaign finance scandals that afflicted leading parties and politicians in Germany and Brazil in recent years), politicians can also be swayed through entirely legal, if not entirely transparent, channels: legal campaign contributions, promises of lucrative employment or consulting opportunities after they leave office, or favours given to friends or family.

Philanthropy as influence

If we are to have any hope of constraining special interests in politics, it is important to acknowledge the full set of instruments that those hoping to influence policy have at their disposal. In our research we have documented that – in an ironic twist – companies’ philanthropic efforts may serve, at least in part, to influence legislators, presumably to obtain laws and regulations that will serve shareholder interests, rather than in the public interest.

We are not the first to observe that companies might strategically deploy their charitable dollars to political ends. A New York Times story in 2008, headlined “Gifts to Pet Charities Keep Lawmakers Happy” (Hernandez and Chen 2008), documented, for example, the lavish donations from defence companies like General Dynamics and Northrop Grumman to Pennsylvania’s Johnstown Symphony, which happened to have the patronage of Joyce Murtha, wife of Representative John Murtha, who sat on the House Armed Services Committee. (The continued controversy over the Clinton Foundation’s funding suggests the same quid pro quo might operate at the country level, with foreign countries and organisations writing multi-million-dollar cheques to the foundation during Hillary Clinton’s tenure as Secretary of State.)

While we focus on the US case, this is far from a uniquely American phenomenon. In the UK, the Anti-bribery Act, for example, cautions British companies on donating to charities abroad, given their potential role in political quid pro quo. One of the biggest political scandals in Israel history, the Holyland Case, involved donations by a real estate developer to a (legitimate) charity founded by Uri Lupolianski, mayor of Jerusalem, to secure land rezoning.

Charitable foundations track PACs

In a new working paper (Bertrand et al. 2018), we show that the anecdotes that journalists and activists have uncovered are representative of a broader pattern that is best explained as companies using their foundations to curry political favour. We find that donations from companies’ charitable foundations follow a pattern that is remarkably similar to the patterns in a more overt form of political influence – their political action committee (PAC) spending. They tend to flow to the same congressional districts, and both increase when a district’s Member of Congress sits on a committee that is important for the company’s business interests. We also look at more personal links connecting politicians to corporate foundation money, and find that non-profits with legislators on their boards tend to get more corporate foundation money, particularly if the politician is on a committee that is relevant for the business. A rough back-of-the-envelope calculation suggests that politically motivated charity by firms is plausibly well over a billion dollars a year, swamping the scale of corporate PAC money.

Why use symphony donations rather than, say, campaign funds or lobbying efforts, to influence government? First, there are limits on PAC contributions, which have been in place for nearly half a century, but none on charitable giving. Additionally, it’s relatively easy for you to look up how much Goldman Sachs’ PAC gave to New York Congressman Sean Maloney (D-NY) in the 2016 cycle since, under rules passed in the 1970s, all such donations must be publicly disclosed (he got $10,000). But following the money from the Goldman Sachs Foundation to Representative Maloney involves more detective work. Finally, while PACs have a bad name – at least on Main Street if not on K Street – corporate philanthropy allows a business to create goodwill in a community while simultaneously pleasing legislators who might oversee the awarding of government contracts or designing regulations.

To uncover potential links between corporate donations and legislative interests, we look at the grants provided by the foundations of companies in the S&P 500 and Fortune 500 lists that comprise the largest companies listed on the US stock market. Because these grants must by disclosed on tax returns, we are able to link most donations to a specific non-profit, which can in turn be pinpointed to a particular geographic location, and finally thus associate it with a specific congressional district. (Getting information on corporate PAC giving was much easier – we can all do it on Opensecrets.org.)

We show that, across congressional cycles, the grants given by a company’s foundation tend to shift to districts that also receive more PAC money, at least suggesting that some part of charitable giving may be politically motivated.

We also show that shifts in both types of funds are driven by some of the same political considerations: When a politician joins a committee that’s important to the firm’s business interests (think of Northrop Grumman and John Murtha joining the Armed Services Committee, a committee that the firm spends a lot of money lobbying), the flow of both corporate foundation and PAC money increase into the congressional district. Similarly, when a member of Congress leaves office, there’s a short-term drop in both corporate charity and PAC money flowing into the district, as an influential legislator is replaced by a freshman.

As an alternative measure linking politicians' interests to individual charities, we use information on board memberships from politicians' annual financial disclosures. We show that a non-profit is more than four times more likely to receive grants from a corporate foundation if a politician sits on its board, after taking account of the non-profit's state as well as fine-grained measures of its size and sector. While there are many reasons that a non-profit that has a member of Congress on its board might also get more corporate money, we also provide evidence that at least some of the bump to money flows is political. Again, we also find that a foundation is more likely to give to a politician-connected non-profit if the politician sits on a committee that is often lobbied by the firm.

While the link between a politician’s importance to a company and PAC contributions may be stronger, the sums of money flowing through corporate charity dwarfs PAC spending. In the 2014 congressional election cycle, for example, annual PAC spending was $464 million, compared to almost $18 billion in annual corporate giving. Our calculations indicate that, even after accounting for the non-political nature of much corporate charity, the political component still very likely swamps PAC giving.

Why we should care

What, then, should we do about corporate charity and politics? You might think, “Who cares? At least they’re peddling influence in a way that benefits communities.”

We would strongly disagree. Most importantly, unlike PAC contributions and lobbying, influence-by-charity is hard for the public (including both the media and voters) to observe. It takes legwork to put together even a story built on individual anecdote, whereas lobbying and PAC records can be found by opening a web browser. In our view, it also violates the spirit of US law which, under the 1954 Johnson amendment to the US tax code, rules that a 501(c)(3) charitable organisation (such as a corporate foundation) cannot:

“[P]articipate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.” (USGPO 2012, sec 2522)

There is good reason to have such rules in place. 501(c)(3) organizations have tax-exempt status, so letting them engage in politics amounts to a taxpayer subsidy of corporations expressing their political voice.

To be clear, we are certainly not opposed to companies spending profits on doing good for the world. And many of the circumstances in which companies can do well by doing good should be celebrated, not condemned. If companies protect the environment, help the poor, and pay living wages in order to please their customers and make their employees happier and more productive, that may be the ultimate win-win for business and society.

We would similarly never suggest limits on corporate philanthropy – not only would it curtail corporate giving that is non-political, but as we have emphasised, companies would simply shift their money and efforts to other channels of influence. By documenting charity-as-influence we hope to highlight the need to follow the money in politics broadly speaking. If we’re to try to regulate influence peddling, we’d do well to take account of the many channels by which corporations can buy influence.

What we would support, unambiguously, is greater disclosure of corporate-funded activities, which provides more information for voters to decide whether relations between politicians and private businesses are acceptable, and hopefully to put pressure on politicians to avoid any exchange of favours that is against the public interest.

Editors’ note: This column is adapted from an earlier posting on the Harvard Law School Forum on Corporate Governance and Financial Regulation.